Ethereum's DETH

Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji)Editor's Note: This article comes from

Blue Fox Notes (ID: lanhubiji)

, Author: Dan Elitzer, translated by "CL" of "Blue Fox Notes", reproduced by Odaily with authorization.

Foreword: DETH in this article is not a single English word, but an abbreviation of Derivative ETH, which represents the most basic form of ETH derivatives of equity pledge assets. Previously, Haseeb and Tarun had proposed that the security of the PoS chain may be weakened as the income of DeFi lending is higher than that of equity pledge. But the premise here is that it can only choose one of them. With the arrival of ETH derivatives, it can be used not only as a pledged asset, but also as a loan, without having to choose one or the other, which also improves the utilization rate of capital.At the same time, this also has a negative impact. Due to the network effect of liquidity, some validator entities that have accumulated a large amount of mortgage assets will gather greater liquidity and further move toward centralization. The composability and future innovation of DeFi will bring us more and more possibilities.Suppose you own an asset. It is called ETH, which is a digital commodity (some people even regard ETH as a currency, refer to the previous article of Blue Fox Notes "

Ethereum Fantasia: A New Model for Ether's Currency

》) You plan to hold on to it for the long term, because you both want it to become more useful, and you want it to be known and found useful by more people.

In the meantime, if you put your ETH to work, that's fine. Today, you can lend it out to earn interest using an open finance (or DeFi) protocol such as Compound, dYdX, or bZx.

But soon, you can not only lend your ETH, but also stake your equity (technically, you will perform a one-way conversion to ETH2 and stake it), thereby increasing your holdings and verifying the transaction as Contribute to Ethereum security. This means, earning income while also securing your network is even better.But what if the return on staking ETH is lower than the return on lending ETH? How much is the warm and fuzzy stuff that secures the web really worth to you? For most of us, I think we can all agree it's going to be all about money.Haseeb Qureshi once wrote the abstract of Tarun Chitra's paper (for details, refer to the previous article of Blue Fox Notes "

How DeFi Can Eat PoS Security?

》), which proposes that DeFi lending yields will be higher than pledge yields, and over time, this will erode the security of PoS because it may lead to low pledge rates.

I just have one question: why not both?

Why not both?

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Superfluid Mortgage Theory

As suggested, Compound did announce and release currently widely used cTokens (cDai, cETH, etc.) which represent claims on assets provided to the protocol. On the other hand, shares in Uniswap pools haven't yet become a popular form of collateralized lending, and I still believe their days are coming, but I'm clearly overly optimistic about its timeline.

As the native asset of DeFi, ETH is perhaps the most obvious and important target for hyperfluidization. Anyone who wants to both stake their ETH and use it for other purposes (eg lending, market making, etc.) should be able to do both without having to choose just one or the other.

secondary title

Superfluid Collateral: Giving ETH Superpowers

How does it work? Similar to how Compound issues cTokens to represent claims on assets provided to the protocol, services such as exchanges and equity pledge pools, which pledge their ETH on behalf of users, can also issue tokens to represent claims on their pledged assets and accrued income. Although it is possible to create derivatives of various types of pledged assets, we refer to the most basic form as DETH or derivative ETH.

Just like CHAI ensures that Dai holders can always earn DSR income (Blue Fox Note: DSR refers to Dai Savings Rate, Dai Savings Rate), without having to lock or unlock Dai for each transaction, DETH also ensures that ETH holders Always be able to earn staking income without having to think about storing, withdrawing, or trying to have 32ETH tied to its validator.

However, unlike DSR, which is truly equivalent to Dai's risk-free rate (earning income without additional risk just by holding Dai), earning verification income with DETH does require taking slashing risk (if the validator node goes offline or makes a mistake) and custody Risk (you trust that the staking service provider will not steal your ETH, lose its private key or be hacked).

As such, not all DETHs will be the same, there is more than one DETH. Each staking service has its own version. Stake Capital has proposed a form of DETH, in the form of LETH, which they call LToken (Blue Fox Notes: Liquid Token, short for Liquid Token).

It is conceivable that there will be BinanceDETH, CoinbaseDETH, and various other DETHs in the future, each of which can be released with the click of a button. Coinbase and Binance have already begun staking certain assets on behalf of their users’ interests, such as XTZ (Tezos), as well as issuing tokenized derivatives of USD deposited by their users (i.e. stablecoins USDC and BUSD). It seems inevitable that these companies will eventually want to issue tokens that represent pledged assets.

Ordinary and boring original ETH requires you to run a validator node to earn the benefits given by the network, and if you want to unstake and use it for other purposes, you need to wait for 18+ hours, and now you can have super awesome, easy and flexible DETH, It can continue to combine each block even as it is lent on Compound or provides liquidity on Uniswap.

What? You don't believe in a free lunch? Very well, you are a smart man. Are you trying to tell me this lunch isn't free?

So nervous!

secondary title

More staking, very centralized

Staking does not inherently have network effects or meaningful returns to scale. That is, by default, there are no economic incentives that would allow someone with a large amount of ETH to earn higher returns from staking, or encourage more people to pool together to use the same staking service.

Still, concentration of wealth is hard to avoid, and people tend to default to other services they see. As a result, most protocol designers actively implement mechanisms aimed at decentralizing token ownership (and thus decentralized staking), or at least encourage greater diversification of the verification infrastructure.

Unlike staking, liquidity has a strong network effect and can create a strong moat. Look at how much volume Tether still has, even after it revealed it was backed by only 74% of its collateral assets in USD - some believe this is because traders see Tether as better, more stable or less risky than USDC, TUSD, etc. ?

Liquidity begets liquidity, and as Tether has shown, it not only survives, it thrives. The stickiness of liquidity is also an important reason why the IEO platform is of strategic significance to the exchange: early tokens are distributed to traders on the originating exchange, thereby starting a liquidity flywheel for new tokens.

By introducing the network effect of liquidity to staking, derivatives of staking like DETH can change the game. Even if BinanceDETH and CoinbaseDETH yielded the same as the smaller independent staking services' DETH yield, increased liquidity or inclusion of more DeFi lending and trading protocols would lead to it being more widely used.

No one wants to destroy ETH lending liquidity on Compound or destroy trading pair liquidity on Uniswap with massive DETH derivatives, and of course MKR holders don't want to use their shiny new MCD with their only original collateral asset functions to manage its stability fee, overcollateralization ratio, and debt ceiling.

Most likely, liquidity will grow into DETH instances issued by the 2-3 largest exchanges or custodians. Once the flywheel starts turning, all DeFi users will have an incentive to deposit their ETH in these services in order to maximize their liquidity and utility.

Soon, the 32 ETH validator staking requirement will appear pointless, as the majority of ETH will be held in custody by a handful of entities, possibly even fewer than the entities that control today's financial and communication networks.

But about...

The most common observation made against this point of view is that DETH trades at a discount to ETH due to its haircut risk. I don't think so.

In my opinion, regulation (especially KYC requirements) is the biggest potential obstacle for DETH. If validators are forced to KYC the owner of every address that receives staked derivatives, it has the potential to undermine its adoption (and many other potential use cases). However, as long as custodial fiat-backed stablecoins become a reality, I don't see why staking derivatives is not possible.

epilogue

secondary title

epilogue

Any asset that can generate yield through homogeneous automation activities can be wrapped, which is suitable for ETH and staking (and thus DETH), but not for reporting on the REP and Augur markets (thus, DREP may , is less likely). However, both ETH and REP can easily earn income from lending and exist in a wrapped form like cETH and cREP.

Wrapped yield-generating assets are attractive for use in DeFi because they allow the underlying asset to be used for multiple purposes simultaneously without adding complexity to the protocol. In an ecosystem built largely on overcollateralized lending, superfluid collateral can maximize returns and reduce capital inefficiencies.

While protocols can be designed to apply superfluid principles natively, warpped yield-generating assets allow these protocols to add new assets as easily as other ERC20 tokens, without fundamentally altering their architecture.